Mortgage Questions Answered – FAQ

Arbor Mortgage understands that you might have some questions about all the different mortgages out there, our FAQ section should help to answer many of those questions. Here are some of the mortgage questions that we are most frequently asked:

Finding the answer to the question of how much house you can afford depends on several factors. While your income plays an important role in determining your ability to pay back the loan, how you have managed your money is critical as well. The size of your downpayment also plays a role in the process. All of this information will help us determine if the house you dream of is out-of-reach. Finding a house you can afford, or more importantly, how much money you can begin the hunt with, is the first step in the process.

The underwriting process has changed since the housing crisis and for many, this is actually a good thing. In the recent past, the ratio of income to debt was higher than it is today. With tighter qualifications, both the borrower and lender can be confident that the house you purchase is the house you can afford.

Lenders are using a different calculation for mortgages than they have in the past. In many instances, the potential monthly mortgage payment could not exceed forty percent of your monthly income. They believed that the remaining sixty percent would be enough to cover most obstacles that might occur over the next thirty years. Because most homes are purchased with two incomes, the forty percent ceiling was too high, especially if one income stream was disrupted. To build some safety for the both the lender and the mortgage holder, the income to house payment ratio was lowered.

The current gross income level for first time home buyers was decreased to twenty eight percent.

There is an additional consideration in this equation, how much total debt does the potential buyer have?

You may have heard that there is good debt and there is bad debt. In the world of lending, all debt is the same. All debt obligations must be serviced on a monthly basis. When a lender considers the addition of a mortgage to the obligations you currently have, they want to be certain that this is a burden you can handle over the long-term. There was a time when the acceptable level of debt was sixty percent of the total household gross income. Recent events have forced lenders to reevaluate that number.

The current debt level that mortgage lenders consider acceptable, and this includes car loans, student loans, and credit card payments, is now closer to thirty-six percent of your gross income. Once again, this is for the long-term protection of both parties.

There are several things a borrower can do. First is to consider: Is now the best time in your life to own a house? This is where Arbor Mortgage Group can help. We work with clients to make these determinations with frank discussions about your income qualifications, credit history and debt levels. With that information in hand, we can discuss down payment requirements and how much house payment your budget can allow.

It may require a short period of regrouping, where loans you currently have can be paid off or restructured. Budget priorities may need to be adjusted. Credit scores may need to improved. All of these steps are a positive part of the process and will help you get the house you can afford.

The down payment is a way to show the lender you are serious. The more you are able to place down on the loan, the greater the chances the loan qualifications can be met. The more money you can put down, the lower the total amount of money that needs to be borrowed to get that house also decreases. As the amount of borrowed money decreases, so will the monthly payment.

Even if you’re sure you have excellent credit, it’s wise to double-check at the outset. Straightening out any errors or disputed items now will avoid troublesome holdups down the road when you’re waiting for mortgage approval.

You may see disputed items, in addition to errors caused by a faulty Social Security number, a name similar to yours, or a court ordered judgment you paid off that hasn’t been cleared from the public records. If such items appear, write a letter to the appropriate credit bureau. Credit bureaus are required to help you straighten things out in a reasonable time (usually 30 days).

Most lenders offer loan financing programs that allow the borrower to finance up to 100% of the sales price of a new home. However, if no down payment is made, the borrower will be required to pay for private mortgage insurance (PMI), see question ten, below, for further information on PMI. If you can afford to put more money toward a down payment, it will reduce the amount of your monthly mortgage payments. Some loans programs offer 3% down payments if you meet certain income standards. The Veterans Administration (VA) and the Rural Housing Service (RHS) also offer no-down-payment loans.

The lender will want to know how much money you plan to put down and the source of those funds. Sources you may draw upon include savings, stocks and bonds, pension funds, real estate holdings, life insurance policies, mutual funds, and employee savings plans.

You may also use a gift of money from a family member that need not be repaid. If you do this, you will need to present a letter to your lender that states the amount of the gift, is signed by the giver, and is notarized by a third party. A gift letter “form” may be obtained from your lender.

You are also now allowed to withdraw up to $10,000 from both traditional and Roth Individual Retirement Accounts (IRAs) with no early withdrawal penalty, if used towards buying your first home.

Under some home mortgage programs, such as Fannie Mae’s Community Home Buyer’s ProgramSM with the 3/2 Option, part of your down payment may come from a grant from a nonprofit housing provider in your community.

Any reputable Mortgage Banker will “pre-qualify” you for a mortgage loan before you start house hunting. This process includes analyzing your income, assets, and present debt to estimate what you may be able to afford on a house purchase. Real estate brokers can also calculate the same sort of informal estimate for you.Obtaining mortgage lending “pre-approval” is another thing entirely. It means that you have in hand a lender’s written commitment to put together a loan for you (subject to verification of income and employment).

Pre-approval makes you a strong buyer, welcomed by sellers. With most other purchases, sellers must tie the house up on a contract while waiting to see if the would-be buyer can really obtain financing.

The term “conforming,” as opposed to “nonconforming,” is sometimes used to explain loans that offer terms and conditions that follow the guidelines set forth by Fannie Mae and Freddie Mac. These are the two private, congressionally chartered companies that buy mortgage loans from lenders, thereby ensuring that mortgage funds are available at all times in all locations around the country.

The most important difference between a mortgage loan that conforms to Fannie Mae/Freddie Mac guidelines and one that doesn’t fit its home loan limit. Fannie Mae and Freddie Mac will purchase home loans only up to a certain loan limit (currently it is $417,000).

If your loan amount will be for more than the conforming loan limit, the interest rate on your mortgage loan may be higher or you may have slightly different underwriting requirements, particularly in regard to your required down payment amount. Check with your lender about this if you are taking out a large loan payment.

Interest rates are usually expressed as an annual percentage of the amount borrowed. You can choose a mortgage with an interest rate that is fixed for the entire term of the loan or one that changes throughout. A fixed-rate loan gives you the security of knowing that your interest rate will never change during the term of the loan. An adjustable-rate mortgage (called an ARM) has an interest rate that will vary during the life of the loan, with the possibility of both increases and decreases to the interest rate and consequently to your mortgage payments.

In the special vocabulary of mortgage lending, “points” are a type of fee that lenders charge (the full term to describe this fee is “discount points”). Simply put, a point is a unit of measure that means 1% of the loan payment. So, if you take out a $100,000 loan, one point equals $1,000.

Discount points represent additional money you can pay at closing to the lender to get a lower interest rate on your mortgage loan. Usually, for each point on a 30-year home loan, your interest rate is reduced by about 1/8th (or .125) of a percentage point.

Tip: Usually, the longer you plan to stay in your home, the more sense it makes to pay discount points.

Annual Percentage Rate (APR) factors interest plus certain closing costs, any points and other finance charges over the term of a loan. The APR must be disclosed to you according to federal Truth-in-Lending laws within three business days of when you apply for a loan, or prior to or at closing for a refinance loan.

On the day you actually buy your new home, in addition to your down payment, the prepaid property tax and homeowners insurance premiums, you’ll need cash for various fees associated with the purchase. These expenses are known as closing costs and are paid by both buyers and sellers.

Some closing costs you pay up-front when you apply for a mortgage loan. Those include money for a credit check on all applicants and an appraisal on the property. Keep in mind that even if you don’t eventually receive the loan, that money is not refundable.

Other closing costs are possible and should be considered when evaluating your financial situation. These may include, but are not limited to:

Title insurance fee

Survey charge

Loan origination fee

Attorney fees or escrow fees

Document preparation fee

Points-up-front, (interest paid in return for a lower interest rate). Each point is one percent of the loan amount. Sometimes you can contract for the seller to pay your points.

If you put less than 20% down on most loans, you’ll be asked to protect the lender by carrying private mortgage insurance (PMI). Carrying PMI ensures that the debt is repaid if you default on the loan. This charge adds approximately an extra half a percent onto the loan. FHA mortgages, in return for their low-down-payment requirements, also charge for mortgage insurance premiums (MIP).